A Change in Direction
Reid, Bill, Independent Banker
Straight talk from bankers about offering nondeposit investment products
Providing deposit products are becoming only part of today's banking industry. Rapid consolidation of the financial services industry, financial restructuring and the blurring of lines between securities activities and traditional banking are in the forefront of community bankers' discussionsand on the agendas of many of the nation's lawmakers.
Turning away from the traditional banking industry mold, big banks are moving aggressively to solidify their customer and deposit bases by diversifying their product lines with investment options. In fact, some of the nation's largest banks boldly advertise themselves as both bankers and brokers; they provide deposit products and sell nondeposit investments, such as mutual funds and annuities.
Yet, only one in five community banks offers retail brokerage services or annuities. Different reasons hold community bankers back from offering such nontraditional products. But there are as many compelling reasons-and ways-that community bankers should be providing these investment products and services. Four community bankers serving different communities and pursuing different goals told Independent Banker why and how they made nondeposit investment products part of their banks' offerings.
David E. Hayes, president of the $116 million-asset Security Bank in Dyersburg, Tenn., and Jeffrey L. Gerhart, president of the $33 million-asset First National Bank of Newman Grove, Neb., have wellestablished retail brokerage programs at their banks. Keith Patten, chairman of the $575 million-asset Camden National Bank in Camden, Maine, is organizing an annuities investment program. And Nancy A. Ruyle, president of the $32 million-asset Citizens Bank of Rogersville, Mo., is launching a retail brokerage services program.
Despite their different locations and bank sizes, these four bankers' insights shed light on the community bank approach to outfitting their banks with non-traditional investment products and services.
What's the Motivation?
Without exception, staying competitive in their marketplaces is the major motivator for community bankers to offer investment products and services. Competitive products and services are what keep valuable customers in the bank.
Competition prompted both Security Bank and First National Bank of Newman Grove to start their existing retail brokerage programs a few years ago.
For First National Bank of Newman Grove, CD deposits were beginning to trickle to brokerage houses within its market, Gerhart says. Aggressive moves by other financial institutions and offices of Edward D. Jones and Co., a large St. Louisbased brokerage firm, pushed Security Bank into retail brokerage services in 1994. "If you think you don't have customers doing business with those [competing investment providers], you're mistaken," Hayes notes.
Ruyle, who is organizing a brokerage program for her bank, says, "Everyone else is offering these products. If customers move part of their money, we may soon lose other [facets of those financial] relationships."
As you might expect, profit is a strong motivator as well for these community bankers. "While we recognize that the greatest competitors for our deposits are mutual funds and the stock market, our objective will be a profitable program," Patten observes. "We know that remaining profitable is the key to our success. We also know that as margins narrow, banks will need more fee income."
Even when bankers begin brokerage or annuities programs for defensive, competitive reasons, established programs can evolve into significant contributors to earnings, Hayes notes.
Bankers may have many reasons for hesitating in starting brokerage or annuities programs. But risk of deposit loss is the greater fear for community bankers offering investment services. …